The Beneficial Owner of Royalty Income, the Application of Tax Treaties, and the Limits of Delegation to Enforcement Decrees: Standards of Judgment in Three Supreme Court Tax Decisions

Question

This brief uses three judgments to set out three matters. The first is the order in which, for withholding on patent royalties, the beneficial owner is identified and it is determined whether the income is domestic-source income. The second is how tax treaties and domestic tax law apply in relation to each other. The third is the value-added tax base and the limits of delegated legislation in the Enforcement Decree of the Value-Added Tax Act.

The first issue is the question addressed in judgment 2019Du50946: "Is the portion of the per-device royalties for Android devices agreed with Samsung Electronics that constitutes consideration for patents not registered in Korea domestic-source income?" The second issue is the question addressed in judgment 2016Du42883: "In a case concerning the beneficial owner of patent royalties paid through an Irish corporation, and whether consideration for unregistered patents is domestic-source income, what is the standard for the tax disposition?"

The third issue is the question addressed in judgment 2025Du34707: "May payments made by an online shopping mall's customers with credit-card partnership points be included in the tax base?" All three judgments ask how, on the record, the boundaries of the statutory wording and the substantive factors for judgment are to be determined.

Material to check

First (2019Du50946): this judgment addresses whether, in relation to corporate tax that has been withheld, the beneficial owner of domestic-source income may request correction of the tax base and tax amount under Article 45-2(1) and (4), subparagraph 3 of the former Framework Act on National Taxes. To determine whether a person is the beneficial owner and the extent of the tax withheld, the tax base and tax amount stated in the withholding tax receipt are examined. Whether the withholding agent paid the tax, and whether the deadline for submitting the payment statement was met, are verified from the submission records.

Second (2016Du42883): this judgment addresses who is to be regarded as the taxpayer liable for income from property where the nominal ownership of the property differs from its substance for the purpose of avoiding tax, and whether this principle applies equally to the interpretation and application of tax treaties. To determine whether the nominal owner has the capacity to control and manage the property, and what the relationship of substantive control and management is, the registration materials showing the nominal ownership of the property and the records showing its actual operation and control are examined. Whether the divergence between name and substance arose from a purpose of tax avoidance is verified from materials setting out the background of the transactions and the payment details.

Third (2025Du34707): this judgment addresses whether an enforcement decree may, without delegation by statute, prescribe fundamental matters concerning tax liability, and whether the portion paid with mileage or similar means is included in the value of supply. To determine how mileage is accumulated and used and how settlement between business operators is structured, the business partnership agreement, the records of point accumulation and use, and the settlement records are examined. The content of the tax base return and the background of the request for correction and the disposition refusing it are verified from the return, the request and the disposition document.

Possible readings

In case 2019Du50946, the issues were whether, in relation to the payment of corporate tax withheld by the withholding agent, the beneficial owner of domestic-source income may request correction under Article 45-2 of the former Framework Act on National Taxes; whether income received in connection with a US corporation's patents not registered in Korea is domestic-source income; and whether, in an action to revoke a disposition refusing correction, the grounds for the disposition may be substituted or changed.

In case 2016Du42883, the issues were who is the taxpayer liable for income arising from property whose name and substance diverge, and whether that principle also applies to the interpretation and application of tax treaties; and whether income received in connection with a US corporation's patents not registered in Korea is domestic-source income.

In case 2025Du34707, the issues were whether an enforcement decree may, without delegation by statute, alter or supplement matters concerning individual rights and obligations prescribed by statute or prescribe new matters; how the scope and limits of delegation by the parent statute are to be determined; and whether matters concerning tax liability may be prescribed by administrative legislation without delegation by statute.

What the decisions held

Supreme Court judgment 2019Du50946, rendered on 10 February 2022, held: "The subject matter of an action to revoke a disposition refusing correction is the objective existence or non-existence of the correct tax amount." In this judgment, the Supreme Court took the view that, absent special circumstances, a withholding agent is obliged under the principle of substantive taxation to withhold tax by reference to the beneficial owner, and that the beneficial owner of the income therefore has a right to request correction under Article 45-2(1) and (4), subparagraph 3 of the former Framework Act on National Taxes. Even where a US corporation's patents registered only abroad were used in domestic manufacturing, sales and the like, the Korea–US Tax Convention takes precedence, so whether the income is domestic-source income must be determined under Article 6(3) and Article 14(4) of the Korea–US Tax Convention. Under the principle of territoriality of patent rights, a right to work a patent has effect only within the territory of the country of registration; the Court therefore held that consideration for the use of patents not registered in Korea cannot be regarded as domestic-source income, and it also rejected the argument that the income was other income. Because the subject matter of an action to revoke a disposition refusing correction is the objective existence or non-existence of the correct tax amount, the tax authority may substitute and change the grounds, within the scope in which their identity is maintained, until the close of pleadings in the fact-finding instance.

Supreme Court judgment 2016Du42883, rendered on 27 December 2018, held: "Accordingly, where a US corporation has registered a patent only abroad and not in Korea, the income that the US corporation receives in connection with it cannot be consideration for its use, and it therefore cannot be regarded as domestic-source income." In this judgment, the Supreme Court held that, under the principle of substantive taxation in Article 14(1) of the Framework Act on National Taxes, where the nominal owner lacks the capacity to control and manage the property, another person substantively controls and manages it through, for example, control over the nominal owner, and the divergence arises from a purpose of tax avoidance, the income is attributed to that controlling and managing person. Unless there is a special provision excluding it, this principle applies equally to the interpretation and application of tax treaties, which have the same effect as statutes. Article 6(3) and Article 14(4) of the Korea–US Tax Convention, following the principle of territoriality, treat as domestic-source income only income received as consideration for the use of a right to work a patent registered in Korea. Income relating to a patent registered only abroad and not in Korea cannot be consideration for its use and therefore cannot be regarded as domestic-source income.

Supreme Court en banc judgment 2025Du34707, rendered on 22 July 2026, held: "If, as a result of the foregoing assessment, the content of a legislative order is found to fall within the scope or limits of the delegation by statute as objectively ascertained, or to have concretely and clearly specified what the statute contemplates, the legislative order does not become void." In this judgment, the Supreme Court set out the standard that an enforcement decree may not, without delegation by statute, alter individual rights and obligations or prescribe new matters not found in the statute. Because the Act before its 2017 amendment contained no basis for including transactions paid for with mileage in the value of supply, the Court held that the enforcement decree provision including mileage accumulated with third parties exceeded the scope of delegation and was void. It found that the statutory amendment of 19 December 2017 inserted wording on transactions paid for with mileage into Article 29(3), subparagraph 6 of the Value-Added Tax Act, so that a basis for delegation existed from 1 January 2018. From that point, the amount equivalent to the settlement payments between business operators could be assessed as standing in a relationship of consideration with the supply, and the Court accordingly held that the enforcement decree provisions both before and after the amendment were valid.

Practical checklist

First, is the portion of the per-device royalties for Android devices agreed with Samsung Electronics that constitutes consideration for patents not registered in Korea domestic-source income? Verify from the registration materials and payment details in the record whether the patents were registered in Korea and how the consideration for their use came to be paid, and check whether the income is domestic-source income under the Korea–US Tax Convention.

Second, in a case concerning the beneficial owner of patent royalties paid through an Irish corporation, and whether consideration for unregistered patents is domestic-source income, what is the standard for the tax disposition? Verify from the relevant records whether the nominal owner had the capacity to control and manage, what the relationship of substantive control and management was, and whether there was a purpose of tax avoidance, and check whether the income is domestic-source income according to whether the patents were registered in Korea.

Third, may payments made by an online shopping mall's customers with credit-card partnership points be included in the tax base? Verify from the record the accumulation and use of points under the business partnership agreement, the structure of settlement between business operators, and the reported value of supply, and check, according to the scope of delegation in the relevant legislation, whether the portion paid with mileage or similar means is included in the tax base.

Glossary

Order for identifying the beneficial owner of withheld royalties and the scope of domestic-source income (2019Du50946): The Supreme Court takes the view that, absent special circumstances, a withholding agent is obliged under the principle of substantive taxation to withhold tax by reference to the beneficial owner, and that the beneficial owner of the income therefore has a right to request correction under Article 45-2(1) and (4), subparagraph 3 of the former Framework Act on National Taxes. Even where a US corporation's patents registered only abroad were used in domestic manufacturing, sales and the like, the Korea–US Tax Convention takes precedence, so whether the income is domestic-source income must be determined under Article 6(3) and Article 14(4) of the Korea–US Tax Convention. Under the principle of territoriality of patent rights, a right to work a patent has effect only within the territory of the country of registration; the Court therefore held that consideration for the use of patents not registered in Korea cannot be regarded as domestic-source income, and it also rejected the argument that the income was other income. Because the subject matter of an action to revoke a disposition refusing correction is the objective existence or non-existence of the correct tax amount, the tax authority may substitute and change the grounds, within the scope in which their identity is maintained, until the close of pleadings in the fact-finding instance. The factors identified for judgment include whether the patents are registered in Korea, their effect within the territory of the country of registration, and whether the payment constitutes consideration for use.

Standards for identifying the beneficial owner and for classifying domestic-source income under the priority of tax treaties (2016Du42883): The Supreme Court held that, under the principle of substantive taxation in Article 14(1) of the Framework Act on National Taxes, where the nominal owner lacks the capacity to control and manage the property, another person substantively controls and manages it through, for example, control over the nominal owner, and the divergence arises from a purpose of tax avoidance, the income is attributed to that controlling and managing person. Unless there is a special provision excluding it, this principle applies equally to the interpretation and application of tax treaties, which have the same effect as statutes. Article 6(3) and Article 14(4) of the Korea–US Tax Convention, following the principle of territoriality, treat as domestic-source income only income received as consideration for the use of a right to work a patent registered in Korea. Income relating to a patent registered only abroad and not in Korea cannot be consideration for its use and therefore cannot be regarded as domestic-source income. The factors identified for judgment include the relationship of substantive control and management, the purpose of tax avoidance, and whether the treaty contains a special provision.

Expansion of the scope of taxation through an enforcement decree and the limits of delegation under the principle of no taxation without law (2025Du34707): The Supreme Court set out the standard that an enforcement decree may not, without delegation by statute, alter individual rights and obligations or prescribe new matters not found in the statute. Because the Act before its 2017 amendment contained no basis for including transactions paid for with mileage in the value of supply, the Court held that the enforcement decree provision including mileage accumulated with third parties exceeded the scope of delegation and was void. It found that the statutory amendment of 19 December 2017 inserted wording on transactions paid for with mileage into Article 29(3), subparagraph 6 of the Value-Added Tax Act, so that a basis for delegation existed from 1 January 2018. From that point, the amount equivalent to the settlement payments between business operators could be assessed as standing in a relationship of consideration with the supply, and the Court accordingly held that the enforcement decree provisions both before and after the amendment were valid. The factors identified for judgment include the legislative purpose and the structure of the provisions, the foreseeability of the delegated content, and whether the provision amounts to new legislation.

Sources and limitations

This brief is based solely on the original texts, as published on the Korea Law Information Center, of Article 14(1) and Article 18 of the Framework Act on National Taxes, Article 60(9), Article 93, subparagraph 8, and Article 98 of the Corporate Tax Act, and Article 29(1), (3) and (5) of the Value-Added Tax Act, and on the texts of Supreme Court judgment 2019Du50946 rendered on 10 February 2022, Supreme Court judgment 2016Du42883 rendered on 27 December 2018, and Supreme Court judgment 2025Du34707 rendered on 22 July 2026.

This is academic research material setting out general legal principles and standards for reviewing records; it is neither legal advice on any individual case nor an opinion for submission to a court.

Points left open

2019Du50946: If consideration for patents used without registration in Korea is not domestic-source income, how much of the tax withheld is the correct tax amount?

2016Du42883: Where the structure of control and management and the country-of-registration standard overlap, in what order should beneficial ownership and domestic-source income be determined?

2025Du34707: Even after a statutory amendment has created a basis for delegation, how far should an expansion of the scope of taxation be accepted?

When to reconsider

2019Du50946: To be revisited if it is shown that the royalties in this case included consideration for copyright, know-how and trade secrets.

2016Du42883: The determination of beneficial ownership is to be revisited if the record shows that the nominal owner had independent capacity to control and manage, or had a purpose other than tax avoidance.

2025Du34707: The determination is to be revisited if the wording of the parent statute changes again and the scope of delegation is altered.

Statutes referred to

• 국세기본법 제14조 제1항, 제18조
• 법인세법 제60조 제9항, 제93조 제8호, 제98조
• 부가가치세법 제29조 제1항·제3항·제5항

Decisions referred to

• 대법원 2022. 2. 10. 선고 2019두50946 판결 · Decision ledger
• 대법원 2018. 12. 27. 선고 2016두42883 판결 · Decision ledger
• 대법원 2026. 7. 22. 선고 2025두34707 전원합의체 판결 · Decision ledger

Verification status

The provisions cited (Article 14(1) and Article 18 of the Framework Act on National Taxes; Article 60(9), Article 93, subparagraph 8, and Article 98 of the Corporate Tax Act; and Article 29(1), (3) and (5) of the Value-Added Tax Act) and the judgments discussed (Supreme Court judgment 2019Du50946 rendered on 10 February 2022; Supreme Court judgment 2016Du42883 rendered on 27 December 2018; and Supreme Court judgment 2025Du34707 rendered on 22 July 2026) were checked against the current legislation on the Korea Law Information Center and the original texts of the Supreme Court judgments as at 15 October 2026. This brief cites only the three judgments listed under the judgments discussed.